The world’s energy landscape is changing rapidly. The emergence of new producers and consumers, regional instabilities, plummeting energy prices, the arrival of disruptive technologies and new climate commitments are all shaking up energy diplomacy and market balances. But who is gaining and who is losing from this ever-evolving panorama? And what are the implications for Europe?
This series of analyses will examine the main strengths and weaknesses of the key players in global energy geopolitics. The aim is to assess the causes and consequences of the ongoing shifts in geostrategic power balances, track energy sector transformations and highlight best practices.
This third analysis focuses on China, the world’s top energy producer, consumer, power generator, investor in renewables and GHG emitter.
Over the last 15 years, China has been implementing a series of policies to support green growth, with spectacular results. The country has emerged as the world’s leader in renewable energy, its coal use and energy-related CO2 emissions are in decline, and its growth model is now less energy-intensive than a decade ago. The new 13th Five-Year Plan (FYP), published in March 2016, reaffirms President Xi Jinping’s vision of building a green, robust and resilient economy for the years to come.
At the same time, China’s energy appetite remains enormous, and its quest for resources has been reshaping energy geopolitics for over a decade. With the world’s largest population and an economy that has grown impressively for decades, Beijing overtook the US as the largest consumer of energy in 2011. Rising domestic coal production, meanwhile, in addition to causing severe air pollution, has meant that the country is among the world’s largest energy producers. Yet even the 2.5Gtoe China produces per year is not enough to meet soaring domestic demand, requiring firm policies to secure fossil fuel supplies.
How is China’s ongoing energy revolution affecting the global energy scene and market trends? And will the recent economic slowdown delay Beijing’s low-carbon shift?
Remainder of a coal-intensive growth model
China consumes 23% of the world’s energy, more than any other country. Its primary energy demand has almost tripled from 1,161Mtoe in 2000 to over 3,000Mtoe in 2013, driven by high-speed industrialisation and urbanisation. Although the pace of demand growth is now slowing, China is still expected to double US energy consumption in 2040 as the result of massive oil needs for transport. Energy consumption per unit of GDP, meanwhile, dropped by 13.4% between 2010 and 2014, a downward trend spurred by the ongoing transition to a less energy-intensive and more services-oriented growth model.
Energy consumption continues to be dominated by fossil fuels, particularly coal. Burning large amounts of coal has undeniably allowed the country to fuel its astronomical economic growth over the last two decades, but has also made China the world’s biggest emitter of greenhouse gases. In 2013, China relied on coal for over two-thirds of its energy consumption – almost 47% of global coal use. The Asian economic giant is also the world’s largest coal importer, reflecting the fact that even though China has the world’s third-largest coal recoverable reserves, these have proved insufficient to meet domestic demand.
But the picture is not entirely grim. 2014 saw the first drop in China’s coal consumption in nearly two decades. The country’s 13th FYP hopes to cap coal use at 5bn tonnes by 2020, reaffirming Beijing’s gradual transition from coal. This is expected to lead to the closure of unprofitable state-owned coal companies, requiring urgent solutions to job losses for millions of coal workers. The coal reality has also encouraged the authorities to seek solutions in carbon capture, utilisation and storage (CCUS) technologies. Clean coal research and demonstration are supported by China’s science and technology programmes, and technology transfer was made possible thanks to enhanced cooperation with the US, the EU, Japan and international institutions. As a result of pro-active policies, China has one of the biggest numbers of CCUS pilot projects in the world. So far, though, none are in operation and a number of technological, financial, regulatory and public acceptance hurdles remain.
Clean tech race leader
China’s transition to a low-carbon economy gained political momentum in the early 2000s as a way of reducing external energy dependency and carbon emissions while preserving economic development. Investment in low-carbon sectors has risen in China rapidly thanks to long-term policy targets, economic incentives, feed-in tariffs, and massive state-led investment. China thus managed to overtake the US also as the largest investor in clean energy in 2012, becoming the centre of global clean energy finance. Last year, according to Bloomberg New Energy Finance, the country invested $111bn in the sector, representing 30% of the world’s total investment in clean energy.
China is now a global leader in renewable technologies, wind, solar, hydro and biogas. The country has five out of the world’s top-10 wind turbine companies, three out of the top-10 solar panel companies in the world, and has installed half of the world’s new hydropower capacity. Under the new 13th FYP, China wants to ramp up its low-carbon economic ambitions even further by more than doubling its wind energy capacity, nearly tripling its solar capacity, increasing electric vehicle sales by a factor of 10, and expanding the green bond market to €210bn in the next five years. Beijing is also supporting nuclear power as a clean source of electricity generation and aspires to become one of the world’s top nuclear electricity producers; its goal being to raise nuclear power capacity from 13GW in 2011 to 70GW by 2020. In its Intended Nationally Determined Contribution (INDC) ahead of the Paris climate conference (COP21), China also committed to meet 20% of its energy needs with non-fossil energy and to reduce carbon intensity by 65%, both by 2030.
Despite these positive developments, low-carbon energy still accounts for a small share of China’s energy mix. The so-called ‘blind expansion’ in wind and solar power driven by high subsidies has hindered their full integration into the market and into the country’s power grid. The country also relies on export markets to get rid of the massive surplus production of solar PV and wind turbines. This has brought a fall in prices of solar modules and led to accusations of dumping by European and North American companies that are losing their market share.
Dash for gas
The dash for domestic shale gas production and expanding natural gas supplies plays a crucial role in China’s efforts to replace coal with less-polluting alternatives. Beijing expects natural gas to account for 10% of the primary energy mix by 2020.
With over 31.6tn cubic metres of estimated recoverable shale gas resources, China holds the largest reserves of shale gas in the world, twice that of US reserves. But hopes to replicate the success of the American shale revolution are being checked by many economic and technical challenges. According to the World Resources Institute, most of China's proven shale gas resources are located in inhospitable areas, making drilling operations more costly.
Chinese state-owned companies have been signing partnerships and joint ventures with foreign investors, mainly American companies, to exploit shale gas resources in the Qiannan and Sichuan basins, with the aim to reduce the costs and gain the necessary knowhow. The expected benefits of unconventional gas exploitation also pushed the Chinese government to set a target of 6.5bn cubic meters of shale gas output by 2015 in the 12th FYP and offer subsidies to shale gas producers. Shale gas exploitation in China remains hindered by low investment levels, technical and regulatory hurdles, lacking infrastructure and severe water shortages facing the country. The 2015 shale gas target was missed and state subsidies were cut. The government also halved its initial production target for 2020.
In addition, Chinese national oil companies have been purchasing ownership interest in LNG projects, signing supply contracts and pipeline agreements with various countries and investing in pipeline and LNG infrastructure to boost the country’s natural gas supply. As a result, China’s natural gas production has tripled in the last decade, and in 2007 the country became a net natural gas importer for the first time in two decades. Despite that, though, challenges including the lack of nationwide infrastructure connections, the high costs of gas-fired power generation and insufficient financial incentives linger. Power generation companies claim to have little return on investment due to the high natural gas cost and low power prices fixed by the government to avoid inflationary effects.
The 'going out' policy
China’s quest for the energy resources needed to feed its fast-growing economy has become a key driving force behind Chinese foreign policy. The country’s energy security master plan has been endorsed by an active ‘Going Out’ strategy, aimed at encouraging Chinese companies, backed by vast foreign-exchange reserves, to expand their businesses worldwide.
China’s booming exports in the wake of its admission to the World Trade Organisation (WTO) in 2001 and the global financial turmoil since 2008 hastened China’s outward investment. State-owned enterprises have rapidly expanded their portfolios of international oil and natural gas assets through direct acquisitions of equity and financial loans. Most of China’s early FDI energy projects were based in high-risk countries such as Sudan, Iraq, Libya or Syria. But several setbacks together with mixed results encouraged the country to shift the focus to areas of greater stability: oil off the coast of West Africa and Brazil, natural gas and coalbed methane in Australia, and oil sands and shale gas in North America. Putting aside evident economic and energy security gains of these long-term commercial investments, cooperation with Western companies operating on the same projects is also aimed at gaining technical expertise in fracking and other techniques that can be used domestically.
Thanks to its ‘Going Out’ strategy, China quickly moved to the front ranks of big global investors, shifting from a major exporter of goods to a major exporter of capital. Nearly $400bn of China’s total $870bn investment worldwide has been in energy. According to the IEA6, between 2011-2013 China invested $73bn in assets in 40 countries in the Middle East, North America, Latin America, Africa and Asia. Meanwhile, Chinese national oil giants – China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC) – have emerged as the major players on the world energy scene, controlling about 7% of global crude oil output. Their growing geopolitical influence is, however, raising questions over the potential impact of China’s commercial interests on its diplomatic decisions, security of global supplies and energy prices.
Energy trade & diplomacy
China’s investment strategy goes hand-in-hand with active energy diplomacy aimed at securing diversified supplies and forging trade ties with numerous partners.
China’s "One Belt, One Road" (OBOR) strategy launched by the government in 2013 is the main initiative to strengthen regional trade flows and infrastructure development. It consists of two routes: the ‘Silk Road Economic Belt’ running from China to Europe through Central Asia, and the ‘21st Century Maritime Silk Road’ linking the country to Southeast Asia, the Middle East and Africa. The programme includes a wide variety of energy projects, from oil and gas pipelines to wind farms, among 65 countries. It is backed by considerable financial resources coming from China’s new $40bn Silk Road Fund, as well as funding from the Asia Infrastructure Investment Bank and the China Development Bank.
China’s energy diplomacy goes well beyond its immediate neighbours. As the world’s largest buyer of crude oil, the country has been increasingly dependent on imports, mainly from the Middle East (53% of the total oil imports), with Saudi Arabia alone supplying 16% of Chinese needs. Saudi Arabia’s dominance is now being challenged by Iraq and Iran gradually boosting their output. In particular, thanks to the recent nuclear deal with Iran, China hopes to cement its position as Iran’s principal trade partner with a new agreement to raise bilateral trade to $600bn within a decade. Since the fall in global oil prices in mid-2014, which halved Beijing’s import bill in the space of a year, West African and Latin American producers are also competing for a share of China’s trade. China’s involvement in South America has been focused on forging ties with oil-financed socialist governments that seek to distance themselves from the United States, namely Ecuador and Venezuela. In Africa, the main interest lies unsurprisingly in oil-rich Angola and Nigeria.
China also intends to ease its dependence on insecure gas transit routes and unstable countries through closer cooperation with Russia. A $400bn gas deal sealed in 2014 envisages Russia supplying 38bcn of natural gas annually — or more than 15% of China’s current demand —by the Eastern route for 30 years from 2018. In a 2015 deal, Russia also agreed to supply China with 30bcm of gas every year by the so-called Western route. Alternative gas supplies are also available, such as liquefied natural gas (LNG) from Qatar and Australia, and pipeline gas from Central Asia.
Fuelling resource competition
Frictions between China and other energy importers over resources are arising from Chinese moves to secure energy supplies.
China is competing with its neighbours as regards access to unexplored oil and gas fields. In the South China Sea, China has territorial disputes with Taiwan and Vietnam over the Paracel Islands, and with Taiwan, Vietnam, Brunei, the Philippines and Malaysia over the Spratlys, both of which are rich in hydrocarbons. A territorial disagreement with Japan has also hindered any possible joint oil and gas exploration in the East China Sea. The two countries agreed in 2008 to jointly develop certain gas fields in the area, but since then both have attempted to get around the deal by unilateral action. Resumed talks have been attempted on numerous occasions, but there is still a long way to go to reach a deal.
Meanwhile, Beijing’s energy dealings with some authoritarian nations have led to international criticism. Moreover, there are fears that Chinese oil companies operating overseas may misuse their dominant position over resources by restricting supplies. Critics also say that increased Chinese military spending is linked to its determination to protect oil transport routes, in particular in the Straits of Malacca. China denies such allegations.
Implications for Europe
As leaders in clean energy investments, China and the EU are both competitors and partners. In fact, China has already overtaken the EU in clean energy investment, renewable energy capacity, R&D spending, power grids and electric car sales. Tensions rose in 2013 after the EU imposed anti-dumping and anti-subsidy measures on imports of solar cells and panels from China, a dispute that continues to rumble on.
However, the shared interest in expanding the global market for low-carbon goods and services to lower the cost of technologies has proven the ideal starting point for a mutually-beneficial partnership in trade, investment and innovation. The Energy Dialogue within the yearly EU-China Summit focuses on six priority areas: renewable energy, smart grids, energy efficiency in buildings, clean coal, nuclear energy and energy legislation. The Europe-China Clean Energy Centre (EC2) was also set up in 2010 by the European Commission, the National Energy Administration of China and the Ministry of Commerce of China, with the support of the Italian Ministry for the Environment, Land and Sea, as a cooperative project to promote the use of clean energy in China.
Keen to sustain its economic growth, China’s leaders have been accelerating the country’s transition from coal. Their progress in energy efficiency and clean energy technologies is as much about security of supply as it is about improving air quality and mitigating the effects of environmental degradation. Yet a sharp economic downturn facing China threatens to hinder its low-carbon ambitions and delay efforts to slow the growth in GHG emissions, raising the temptation to stimulate short-term growth at the expense of long-term sustainability.
China’s ongoing energy revolution has far-reaching consequences for global energy trends and great-power politics. As the leading player in the global energy market, China’s commercial interests and decisions regarding its energy portfolio will affect not only the competition for energy sources, but also global energy prices. More importantly, China’s low-carbon policies will determine the future of renewable technologies, innovation and investment in the world, and the success of global climate change efforts.
- Friends of Europe report China’s 13th Five-Year Plan
- Friends of Europe article Frankly speaking -Don’t let MES woes affect EU-China ties
- Friends of Europe background briefing Energiewende made in China: Paving the way towards green growth
- Europe’s World article A New Chapter in China-EU Relations
- Debating Europe As China’s cities grow, is there a role for Europe?